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ECONOMIC DATA ANALYSIS - MARKETS LOOK FOR US REBOUND
ANALYSIS FRIDAY 28 MARCH 2014
MARKETS LOOK FOR US REBOUND
- US payrolls in focus with markets
expecting a post-winter rebound
- ECB policy expected on hold as
inflation approaches a low
- Japan’s Tankan to reflect firmer
outlook for Q1 GDP before sales tax hike?
Risks give way to signs of firmer activity ... Despite concerns
about ongoing developments in Ukraine and more troubling signs emerging from
China, including a short-lived bank run this week, equity markets appear to be
more upbeat. Equities in US, Euro area and UK remain close to recent
highs (although the FTSE 100’s greater resources exposure has left it somewhat
lower). Market sentiment has remained underpinned by hopes of a more
significant rebound in the US and relatively buoyant activity in the Euro area.
Yet bond yields remain low, with fixed income particpants seemingly more
concerned about the outlook.
Rebound ? ... It is a key
week for releases in the US with the national ISM indices and the latest
payrolls report for March. The question is whether the US will start to show
more convincing signs of a rebound in activity as it recovers from a severe
winter. Recent survey evidence has been mixed with the Empire State survey
showing little sign of recovery, but the Philadelphia Fed survey showing a more
robust rebound. We forecast some improvement in the ISM indices, particularly
the more affected non-manufacturing index. But most interest will fall on
payrolls. We forecast a 210k rise in the headline number, but acknowledge the
ri er rise reflecting some catch-up in employment. The unemployment rate is
likely to fall back to 6.6% - on the cusp of the Fed’s previous forward
guidance threshold. However, as the Fed moved to a more qualitative assessment
in the future, markets will also focus on wage developments. Annual earnings
growth rose to 2.2% in February. We forecast a modest acceleration to 2.3% this
month. Any sign of a faster pick-up would raise concerns about the pace that
the labour market is tightening. Fed Chairwoman Yellen’s speech on Monday may
provide further clarity on policy.
Euro area inflation to reach nadir
... Before Thursday’s ECB meeting, markets will focus on the
preliminary release of March HICP inflation. This was just 0.7% in February and
we expect a further fall this month, driven by base effects from last year. We
forecast a drop to 0.5%, softer than consensus, that will likely further fan
deflation concerns in the Euro area. However, we expect March’s reading to mark
the nadir in the inflation cycle, with base effects likely to lift the annual
rate as soon as next month. This may help explain the ECB’s more sanguine
assessment of deflation risks. This month’s meeting is likely to see no change
in policy. While the ECB continues to forecast euro area recovery - a view
supported by recent data - it is likely to maintain its outlook for a gradual
rise in inflation towards target over the coming years. We now doubt there will
be further stimulus from here. However, recent comments from Germany’s Weidmann
suggest that QE may not be off the cards should the area suffer a significant
Japan’s crunch time ? ...
Japan publishes its quarterly Tankan for Q1 in the coming week. We forecast a
relatively robust pick-up in GDP in Q1, forecasting 0.7%. This looks likely to
be boosted by faster consumption spending as Japanese households attempt to
avoid April’s sales tax hike. The economy’s reaction to the increase in the
sales tax will be key in assessing the outlook for growth for the rest of the
year and to gauging the outlook for Bank of Japan policy.
UK focus on Bank releases ...
Domestically the coming week’s PMIs are unlikely to have much market impact
with our forecasts for only modest declines. Markets are likely to focus on the
record of the latest FPC meeting, despite this week’s policy statement
suggesting little hardening of views to date. The Bank also publishes its Q1
Credit Conditions Survey on Thursday.
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